New temporary loss carry-back scheme to put cash in struggling firms' pockets; Changes to tax loss continuity rules to help firms raise capital 

New temporary loss carry-back scheme to put cash in struggling firms' pockets; Changes to tax loss continuity rules to help firms raise capital 

The Government has announced another multi-billion-dollar wave of support for businesses, largely through tax changes.

It has also unveiled changes to commercial property rules, detailed in this story

The new measures include:

A tax loss carry-back scheme

The temporary scheme will enable firms to offset losses in a particular tax year against profits in a previous year, and receive refunds of the tax paid in the previous profitable year.

This will give firms anticipating a loss, some cash.

The mechanism will be included in a bill introduced when Parliament resumes sitting after April 28. It will be applied retrospectively. 

It is expected to cost the Crown $3.1 billion over two years.

Here is a government-provided example of how it will work:

Wiki Wiki Hospitality Limited (Wiki) has had a profitable year for the year ended 31 March 2020. It has not yet finalised its tax return, but it is expected to return $2m net income. Its final provisional tax payment for the expected $2m income is coming up on May 7, where it expects to pay $250,000 in tax (it has already paid $310,000 in early provisional tax instalments).

However, because of COVID-19, it is not operating at the moment, and does not know when it will be allowed to resume operating. It is still paying its staff (supported by the wage subsidy scheme) and rent. It seems inevitable that it will make a loss in the year ended 31 March 2021. In early May, the directors meet with the CFO and forecast some scenarios. In all the scenarios, Wiki will make a loss of $1.5m for the year-ended 31 March 2021, although some scenarios sees it making a $2m loss.

Knowing it will face use-of-money-interest charges if it over-estimates its loss, Wiki decides to carry-back the more certain loss of $1.5m to the 2019/20 year, and re-estimate its income for that year to $500,000 (down from $2m). Because it has already paid $310,000 in tax, it pays nothing on May 7, and receives a refund of $170,000 from its earlier provisional tax payment.

In short, for the 2019/20 year, Wiki returns $500,000 of income and pays $140,000 tax, receiving back its earlier payments as refunds.

Changes to tax loss continuity rules

The Government has made an “in-principle” decision to change rules to make it easier for firms to raise capital without losing the benefit of their existing tax losses.

Details around this are still being finalised. They’ll be included in a bill in the second half of 2020 and will apply from the 2020/21 income year.

The change is expected to cost the Crown $60 million a year.

Here is a government-provided example of how this will work:

A start-up firm, Conference in the Clouds Limited (CIC) offers microphone and webcam software. It has been making large losses in recent years. However, it now wants to scale up significantly, given that more people are working from home and using videoconferencing.

Despite its promising early-development software, banks are unwilling to lend to CIC without it having a firm revenue base. CIC has approached several investors, and has received an offer from a video conferencing company, Cloudcon Limited (Cloudcon), to inject millions of dollars into CIC in return for a 75% stake in the business. CIC wants to accept the investment, but is wary of losing the value of its losses, which would be extinguished under the current shareholder continuity test. The government's new ‘same or similar business’ test ensures that CIC can take on the new investor without losing its losses because its business will be of a same or similar nature as the business it was carrying on when it made the losses.

Given this, the price CIC’s owners receive for the 75% equity stake is higher (the business receives a greater capital injection) as the ability to carry forward losses makes the business more valuable to investors.

Flexibility around tax deadlines

Inland Revenue will be given greater flexibility to modify timeframes or procedural requirements for taxpayers impacted by COVID-19.

This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax.

At this stage, the power will be limited to a period of 18 months and will apply to businesses affected by COVID-19.

Business consultancy support

Businesses will be able to access free, tailored specialist support related to the likes of business continuity planning, finance and cash flow management, HR and staffing issues, and potentially any sector-specific issues.

The Regional Business Partner Network will scale up their existing advisory services so that more businesses can receive support over the next 12 months.

Existing helplines often used by business - those operated by the Employers and Manufacturers Association and the Canterbury Chamber of Employment and Commerce - will also be extended.

This support measure is expected to cost taxpayers $25 million over 12 months.

Keeping businesses solvent

Finance Minister Grant Robertson said: “We have taken decisive action throughout this pandemic to cushion the blow for our businesses and workers - today’s announcement continues that focus.

“We need our businesses to stay solvent to help with the economic recovery as we emerge from this health crisis.

“Our focus on cashflow and confidence continues through these measures.”

More to come

These changes come in addition to the Government committing to temporarily changing the Companies Act to help firms facing insolvency due to COVID-19 remain viable.

The Government has already committed more than $20 billion towards the likes of wage subsidies, benefit increases and additional business tax changes.

It has reinstated depreciation deductions for commercial and industrial buildings, raised the threshold for provisional tax payments, waived interest on some late tax payments and allowed immediate deductions for low value assets.

Work is underway on further support for businesses and households as the impacts of COVID 19 become clearer.

See this document or the IRD's website for more on the changes announced today. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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7 Comments

Thanks Jen, this one is a clear good helps from govt. targeted the small firms, I wish we could see more of such 'suspend/deferral' period from ... Banks, as they only year in/out have 'growth' to be reported the worst is just 'downgraded'.. but in negative trading territory? very very very rare.

Why are commercial landlords in need of government support? Its the domain of the deepest pockets in our society, surely they have enough liquidity and asset backing to stand on their own feet for a few quarters till things settle down? Protect their tenants, they are the productive part of the economy!

The deepest pockets in our society are the banks who are not losing anything to date commercial landlords are not all rich that is a generalization many commercial landlords are small premise holders not multimillionaires. In the current environment any landlord would be keen to assist tenants it is a no win situation to lose your tenant costing heaps to go through that process including legal fees and the cost of replacing them if possible.

Not true, perhaps the owner of the small corner dairy might be a bit small time but its commercial property I am talking about, real commercial property, the big stuff like shopping malls and industrial properties..you don't get into that sort of asset class with the spare change in your ashtray. Watch what happens when the small tenants in the big shopping malls across the country start to get booted out after missing a few lease payments, I think you'll see my point then.

It seems to me that unless the exemplified WikiWiki company has very substantial cash assets (and as a hospo company this is frankly highly unlikely), plus a rock-solid relationship with its bankers, landlords and creditors, it is simply gonna run clean out of cash-at-bank, let alone working capital, well before the year is out. The phrase 'trading while insolvent' springs to mind, and while Da Gubmint has maybe, possibly, waved this circumstance away, surely it would be better for directors to liquidate the show, thus letting the fire sale of the assets proceed, and for a new sucker owner (who has hopefully done the due diligence...) to pick up and carry on. Sometime in the future...

No, no. You're confusing 'what should happen' with 'what's going to happen'.
It's a false economy of course. But that seems to be the new business model of the day.

The tax-loss carry back scheme is actually really good and is truely helpful. Well explained as well. Well done!